-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KrHIyLFnBeWylzkihMpBChzDxCtOT89k239nRrA7/EjzGR5f9STi/Cc3kjI5Y+v0 AsX0Pc2IpMy8QNz85P3cgg== 0000753557-00-000009.txt : 20000518 0000753557-00-000009.hdr.sgml : 20000518 ACCESSION NUMBER: 0000753557-00-000009 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LBO CAPITAL CORP CENTRAL INDEX KEY: 0000753557 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 382780733 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 033-19107 FILM NUMBER: 638820 BUSINESS ADDRESS: STREET 1: 7001 ORCHARD LAKE RD STREET 2: STE 424 CITY: WEST BLOOMFIELD STATE: MI ZIP: 48322-3608 BUSINESS PHONE: 2488515651 MAIL ADDRESS: STREET 1: 7001 ORCHARD LAKE ROAD STREET 2: SUITE 424 CITY: WEST BLOOMFIELD STATE: MI ZIP: 48322 10-K/A 1 LBO AMENDMENT TO FORM 10-K FOR Y/E 12/31/99 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 December 31, 1999 33-19107 - --------------------------- --------------------- (For the fiscal year ended) (Commission File No.) LBO CAPITAL CORP. (Exact name of Registrant as specified in its charter) Colorado 38-2780733 - ---------------------------- ------------------------------- (State or other jurisdiction (I.R.S. Employer Identification of organization) Number) 7001 Orchard Lake Road, Suite 424 West Bloomfield, MI 48322 - --------------------------------------- ------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (248) 851-5651 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $.0001 Par Value ------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 Days: Yes X No As of December 31, 1999, a total of 12,100,000 shares of common stock, $.0001 par value, were outstanding and the aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $116,488 based on the average of the bid and asked prices on that date $.03 as reported by The National Quotation Bureau, Inc. LBO CAPITAL CORP. FORM 10-K PART 1 ITEM 1. BUSINESS General - ------- LBO Capital Corp. (the "Registrant") was organized under the laws of the State of Colorado on October 8, 1987. The Registrant was formed based on the belief of its management that there are business opportunities that, for one or more reasons, are available for acquisition by the Registrant. On March 15, 1988, the Registrant completed a public offering of 3,000,000 Units, each Unit consisting of one share of its common stock, one Callable Class A Warrant, one Callable Class B Warrant and one Callable Class C Warrant. The Warrants are detachable from the Units and may be traded separately in the over-the-counter market. Each Class A Warrant entitles the holder thereof to purchase at a price of $0.50, one share of Common Stock at any time until February 26, 1989. Each Class B Warrant entitled the holder thereof to purchase at a price of $0.75 one share of Common Stock at any time until August 26, 1989. Each Class C Warrant entitled the holder thereof to purchase at a price of $1.00, one share of Common Stock at any time until February 26, 1990. The expiration dates of these warrants were subsequently extended by the Board of Directors to expire on various dates, the latest being July 25, 2000. A Form 8-K was filed on July 12, 1999 reporting this extension. The Registrant received net proceeds of approximately $474,300 after payment of all costs of the offering. Since its inception, the Registrant has directed its activities toward evaluating potential business opportunities with the goal of acquiring and continuing one or more business opportunities. The Registrant may acquire an existing business which may be a corporation, partnership or sole proprietorship. One form which such a business combination might take would be an exchange of the Registrant's stock for stock of the acquired business. However, the Registrant may exchange its common stock to acquire the assets of this entity, or may purchase a percentage of the entity outright. The Registrant has evaluated and attempted to acquire a number of entities to date. ACQUISITION OF ASSETS - --------------------- Ajay Sports, Inc. - ----------------- On April 3, 1989 LBO acquired an aggregate of 1,880,000 shares of the restricted common stock of Ajay Sports, Inc. ("Ajay") for a total cash purchase price of $182,000. In 1991, the Registrant pledged 400,000 shares of Ajay to a bank as collateral for $300,000 in loans to Hendricks Manufacturing Company. On July 1, 1991, this bank declared the loan in default and foreclosed on the shares. On August 13, 1998, Ajay announced that its board of directors had authorized the implementation of a 1-for-6 reverse split of the company's common stock, effective with the commencement of trading on August 14, 1998. The reverse split was approved by the stockholders of Ajay at the company's annual meeting on May 29, 1998. Following the reverse split, holders of Ajay's common stock received one new share of $.01 par value common stock for every six shares of common stock currently held. Therefore, the number of Ajay shares held by the Company is 246,667. The reverse split also affected the number and exercise price of the Company's warrants, such that the Company now holds 33,333 warrants entitling it to purchase one share of Ajay's common stock at $1.08 per share. The 246,667 common stock and 33,333 warrants owned by the Registrant represented 6.7% of the total shares of Ajay common stock outstanding as of December 31, 1999. The decrease is the result of new shares issued. Ajay's Common Stock ("AJAY") and Units ("AJAYU") are trading on the Nasdaq Small Cap and the Warrants ("AJAYW") have been traded over-the-counter since 1989 and are reported by the National Quotation Service. The following table sets forth the range of high and low trade prices for the common stock: HI LOW ------ ------ 1999 ---- First Quarter $ 1.063 $ .688 Second Quarter $ 3.000 $ .688 Third Quarter $ 2.063 $ .813 Fourth Quarter $ .938 $ .500 On June 10, 1993, Thomas W. Itin, President and Chairman of the Board of Directors of the Registrant, was elected to the positions of Chairman of the Board of Directors and Chief Executive Officer of Ajay Sports, Inc. It is felt that the direct intervention by the Registrant's management into the operations of Ajay would have a positive effect on the Ajay earnings and the value of the Ajay stock held by the Registrant. Business Ajay Sports, Inc., through its operating subsidiaries Ajay Leisure Products, Inc., Palm Springs Golf and Leisure Life, Inc., is a leading manufacturer and distributor of golf bags, clubs, carts, accessories and casual living furniture throughout the United States. Enercorp, Inc. -------------- On November 21, 1994, the Registrant bought 2,667 shares of Enercorp, Inc. for $8,702. During 1996, the Registrant bought 12,674 additional shares of Enercorp, Inc. for $39,694. Enercorp, Inc. is a business development company under the Investment Company Act of 1940, as amended. On June 22, 1999, the Company loaned $300,000 to Pro Golf International, Inc. ("PGI"), a subsidiary of Ajay Sports, Inc. The Company received two promissory notes that is subordinated to PGI's primary lender. The unpaid principal balance will bear an interest rate of 10% and will be due and payable in full on July 22, 2000. The balance ,including interest, at December 31, 1999 was $315,781. The proceeds were used to purchase all the outstanding capital stock of Pro Golf of America, Inc., franchiser of Pro Golf Discount retail golf stores. Ajay owns over 80% of the stock of Pro Golf International, with the remaining shares held by a group of investors. Competition - ------------ The Registrant expects to encounter substantial competition in its efforts to locate businesses for acquisition. The primary competition for desirable business acquisitions is expected to come from other small companies organized and funded for purposes similar to the Registrant, small venture capital partnerships and corporations, small business investment companies and wealthy individuals. Should the Registrant elect to engage in a leveraged buyout acquisition, competition may also be anticipated from investment bankers. Many of these entities have significantly greater experience, resources and managerial capabilities than the Registrant and are therefore in a better position than the Registrant to obtain access to businesses. Employees - --------- As of December 31, 1999, the Registrant had no employees. ITEM 2. PROPERTIES The Registrant currently uses office space provided by Acrodyne Corporation, a company whose Chairman and President is also Chairman and President of the Registrant. The space is used for purposes of administration and development. While the Registrant does not pay any rent, it does pay a monthly fee of $150 for the direct operating expenses. The Registrant believes its current facilities are sufficient for its present business activity. ITEM 3. LEGAL PROCEEDINGS The Registrant is not a present party to any material pending legal proceedings and no such proceedings were known as of the filing date. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Registrant's shareholders during the fiscal year ended December 31, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common Stock - ------------ The principal market on which the Registrant's common stock, $.0001 par value, is traded on the Over-The-Counter market. Prices for the Common Stock have been reported in the National Daily Quotation Service "Pink Sheets" published by the National Quotation Bureau since March 15, 1988. The high and low trade price quotations for the Registrant's Common Stock during the quarters ended on the dates listed below is as follows: Trade Prices ------------ HI LOW ---- ----- 1998 ---- First Quarter $ .035 $ .03 Second Quarter $ .03 $ .25 Third Quarter $ .03 $ .02 Fourth Quarter $ .03 $ .02 1999 ---- First Quarter $ .025 $ .025 Second Quarter $ .03 $ .025 Third Quarter $ .03 $ .03 Fourth Quarter $ .03 $ .03 On December 31, 1999, the high trade price reported for the Common Stock was $.03 and the low trade price was $.03. As of December 31, 1999, the number of record holders of the Registrant's Common Stock was 265. This figure excludes an undetermined number of shareholders whose shares are held in "street" or "nominee" name. The Registrant has never paid a dividend with respect to its Common Stock and does not intend to pay a dividend in the foreseeable future. Units - ----- Prices for the Units have been reported in the National Daily Quotation Service "Pink Sheets" published by the National Quotation Bureau since March 15, 1988. The high and low quotations for the Registrant's Units during the quarters ended on the dates listed below is as follows: Trade Price ----------- HI LOW ---- ----- 1998 ---- First Quarter $ .035 $ .03 Second Quarter $ .03 $ .025 Third Quarter $ .03 $ .02 Fourth Quarter $ .03 $ .02 1999* ----- *No units traded in 1999. Each Unit consists of one share of the Registrant's Common Stock, one Callable Class A Warrant, one Callable Class B Warrant and one Callable Class C Warrant. Warrants - -------- No ask or bid quotations were reported by the National Quotation Bureau, Inc. since December, 1989. *Prices are inter-dealer quotations as reported by the National Quotation Bureau, Inc., New York, New York, without adjustment for retail mark-up, mark-down or commission and may not necessarily represent actual transactions. ITEM 6. SELECTED FINANCIAL DATA December 31 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- Working Capital $(672,330) $(599,097) $(560,736) $(498,352) $(427,094) Cash 63 73 43 78 78 Marketable Securities 32,600 46,023 24,972 28,765 8,000 Notes Receivable 300,000 0 0 0 0 Interest Receivable 15,780 0 0 0 0 Total Assets 348,443 49,096 24,972 28,843 8,251 Total Liabilities 1,020,773 645,193 585,708 527,195 435,345 Shareholders' Equity (672,330) (599,097) (560,736) (498,352) (427,094) December 31 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- Total Operating Revenue $15,781 $0 $0 $0 $0 Total Operating Exp. 75,590 59,454 8,549 52,328 35,173 Net income (loss) before equity loss of affiliate (59,809) (59,454) (58,549) (52,325) (35,173) Equity in net loss of affiliated company 0 0 0 0 0 Net income (loss) (59,809) (59,454) (58,549) (52,328) (35,173) Net Income (loss) per common share ( .00) ( .00) ( .00) ( .00) ( .00) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources - ------------------------------- Working capital at December 31, 1999 was decreased by $73,232 from the period ended December 31, 1998. This was mainly caused by a net loss of $59,809, a decrease of $13,423 in the market value of securities available for sale. On December 2, 1996, the Registrant had a change in its borrowing arrangements. The Registrant borrowed $325,790 from Dearborn Wheels, Inc. to repay a note payable to Michigan National Bank. The principal balance as of December 31, 1999, was $823,201 and the interest due was $194,021. The loan is at prime plus 2% interest and is secured by all the intangible assets of the Registrant. Dearborn Wheels, Inc. is held in majority by the Registrant's President's spouse. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements required to be furnished hereunder are attached hereto under Item 14. Supplementary Financial Schedules for which provision is made in applicable Regulations of the Securities and Exchange Commission, have been omitted or the required information is not required under the related instructions, or the information is presented in the Financial Statements and Notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Identification of Directors and Executive Officers The following table sets forth the name, address, age and position of each officer and director of the Registrant: Term Name and Address Age Position as Director - -------------------------------------------------------------------------------- Thomas W. Itin 65 President and Since 7001 Orchard Lake Rd. Chairman of the Inception West Bloomfield, MI 48322 Board of Directors Anthony B. Cashen 63 Secretary, Since RD 2 Box 203 Treasurer and Inception Ghent, NY 12075 Director Robert W. Schwartz 55 Director Since 120 DeFreest Drive March 28, Troy, NY 12180 1991 All directors of the Registrant will hold office until their successors have been elected and qualified or until their death, resignation or removal. The bylaws of the Registrant provide that the number on the Board of Directors shall be determined by resolution of the Board of Directors. The officers of the Registrant are elected at the annual meeting of the Board of Directors and hold office until their successors are chosen and qualified or until their death, resignation or removal. The Registrant is subject to Section 13(a) of the Securities Exchange Act of 1934 and is therefore not required to identify or disclose information concerning its significant employees. There are no family relationships between any director, executive officer or person nominated or chosen by the Registrant to become a director or executive officer. Below is a summary description of educational and professional background of each executive officer and director of the Registrant. Thomas W. Itin. Mr. Itin has served as the Chairman and President of the Board - --------------- of Directors of the Registrant since inception. Mr. Itin was elected Chairman of the Board and President of Ajay Sports, Inc. in June of 1993, and is the largest single stockholder. Mr. Itin has been a director of Williams Controls, Inc., a publicly held company since its inception in November 1988. Mr. Itin serves on the Cornell University Council and is Chairman of the Technology Transfer Committee of the Council. Mr. Itin has been Chairman, President and Owner of TWI International Inc. since he founded that entity in 1967. TWI acts as consultant for mergers, acquisitions, financial structuring, new ventures and asset management. Mr. Itin also is the owner and principal officer of Acrodyne Corporation since 1962. Mr. Itin was awarded a Masters of Business Administration degree from New York University and received a Bachelor of Sciencee degree from Cornell University. Anthony B. Cashen. Mr. Cashen has served as the Registrant's Secretary, - -------------------- Treasurer and Director since inception. He has also served as a director of Ajay Sports, Inc. since 1993. For the past five years and until his retierment in December 1999, Mr. Cashen has served as managing partner, then as a Senior Partner of LAI Ward Howell a publicly held management consulting and executive recruiting firm located in New York City. He currently serves as a Director of Immucell Corp., and Williams Controls, Inc., both publicly held companies. Previously, Mr. Cashen has been an officer and principal of the investment firms A.G. Becker Inc. and Donaldson, Lufkin and Jenrette, Inc. He received an MBA from the Johnson Graduate School of Management at Cornell University, and a Bachelor of Science degree from Cornell University. Robert W. Schwartz. Mr. Schwartz has served as Director of the Registrant since - ------------------ March 28, 1991. Since 1985 he has been Chairman and President of Schwartz, Gordon, Heslin & Associates, Inc., a management and financial consulting firm in Troy, New York. From 1987 until 1991 he was a Director and Vice President and Treasurer of ESARCO International, Inc., a publicly held company which licenses and markets all-terrain trucks. Previously Mr. Schwartz was President and Director of Winsources, Inc., a telephone equipment supplier, President and Director of Cordian Corporation of Latham, New York, a telephone equipment manufacturer, and Vice President of Finance of Garden Way Manufacturing Company, Inc., a manufacturer of rototillers and outdoor equipment. Mr. Schwartz received a B.S. degree in industrial and labor relations from Cornell University and did graduate work at State University of New York at Albany. ITEM 11. EXECUTIVE COMPENSATION The Registrant reimburses its directors for expenses incurred by them in connection with business performed on the Registrant's behalf, including expenses incurred in attending meetings. In addition, directors receive a fee of $250 for each Board of Directors meeting attended. No such reimbursements were made for the period from January 1, 1990 to December 31, 1999. While none of the officers received any salary, such individuals are reimbursed for all accountable expenses incurred on behalf of the Registrant. See Item 13 - Certain Business Relationships and Related Transactions under Acrodyne Corporation for additional information. The Registrant has no defined benefit and actuarial plan providing for payments to employees upon retirement. The Registrant also has no plans for awarding stock options. No other compensation was paid to officers or directors of the Registrant from January 1, 1990 to December 31, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table contains information as of March 31, 2000 with respect to beneficial ownership of the Registrant's Common stock by each person known by the Registrant to be the beneficial owner of more than five percent thereof, by the executive officers and directors of the Registrant and by all executive officers and directors of the Registrant as a group: Common Stock Beneficially Percent Owned (1) of Class ------------------------------------- Thomas W. Itin 7,717,073 (2)(3)(4) 57.2% Anthony B. Cashen 400,000 (4) 3.3% Robert W. Schwartz 100,000 (4) .8% Officers and Directors 8,217,073 (3) 61.3% as a group (3 persons) James T. Emerson 695,000 5.7% 221 E. Colonial Drive Orlando, FL 32801 (1) Without giving effect to the exercise of outstanding Warrants except as noted in footnote 4 below. (2) These shares are held of record by entities of which Mr. Itin is either a principal or a beneficiary. (3) Includes 300,000 shares held by Mr. Itin's wife, Shirley B. Itin, either as beneficiary or custodian, of which Mr. Itin disclaims any beneficial ownership. (4) These shares include warrants granted on June 3, 1992 expiring December 4, 2000, to purchase one share of common stock per warrant for $.04. (Thomas W. Itin, 1,000,000, Anthony B. Cashen, 200,000, Robert W. Schwartz, 100,000) ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with Management and Others. - --------------------------------------- None of the Registrant's officers and directors devote their full time to the Registrant's affairs and such persons may be affiliated with other business entities and enterprises, some of which may be formed for similar purposes as the Registrant and thus be in direct competition with the Registrant. Such activities may result in such persons being exposed to conflicts of interests from time to time. The Registrant has adopted no conflict of interest policy with respect to such transactions. However, the officers and directors of the Registrant recognize their fiduciary obligation to treat the Registrant and its shareholders fairly in any such future activities. Certain Business Relationships. - ------------------------------ In the Registrant's last full fiscal year the Registrant made payments for property and services in excess of five percent of the Registrant's consolidated gross revenues to Acrodyne, a company whose Chairman, President and major stockholder of the Registrant. The Board of Directors of the Registrant has reviewed and approved the use of Acrodyne and has determined that the fees charged the Registrant by Acrodyne are as favorable as could be incurred by any other independent, third party business consultant. It is anticipated that the Registrant will continue to utilize Acrodyne in the future. The total sum which the Registrant paid Acrodyne for the year ended December 31, 1999 was $3,300 for the above mentioned consulting services and out-of-pocket travel expenses, staff time spent for accounting, record keeping, and utilities, but did not include fees for services of the Chairman. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements The Financial Statements are listed in the "Index to Financial Statements" filed as part of this Annual Report, on page F-2. (a) (2) Financial Statement Schedules Supplementary Financial Schedules for which provision is made in applicable Regulations of the Securities and Exchange Commission, have been omitted or the required information is not required under the related instructions, or the information is presented in the Financial Statements and Notes thereto. Pursuant to the provisions of Rule 3-09 of Regulation S-X, the Registrant is required to file separate audited financial statements of its equity basis investee, Ajay Sports, Inc. ("Ajay"). Ajay's audited financial statements for December 31, 1999 are filed within this report. (a) (3) Exhibits The Articles of Incorporation and By-Laws of the Corporation are incorporated by reference to the Registrant's Registration Statement on Form S-18, effective December 16, 1987. Exhibit 27.0 Financial Data Schedule is filed herewith. (b) Reports on Form 8-K. A Form 8-K was filed on July 12, 1999 regarding the extension of the expiration date of the Registrant's warrants from July 25, 1999 to July 25, 2000. A Form 8-K was filed on December 1, 1999 to extend the exercise period of the Registrant's warrants issued to its directors from December 4, 1999 to December 4, 2000. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. LBO CAPITAL CORP. (Registrant) By: \s\Thomas W. Itin ------------------------- Thomas W. Itin, President & Chief Financial Officer Date: April 14, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the (date) Signature Title - ----------- ------------------------- \s\Thomas W. Itin Chairman of the Board of Directors, - --------------------- Chief Executive Officer and President Thomas W. Itin \s\Anthony B. Cashen Secretary, Treasurer and Director - --------------------- Anthony B. Cashen \s\Robert W. Schwartz Director - ----------------------- Robert W. Schwartz LBO CAPITAL CORP. TABLE OF CONTENTS ------------------- Page Independent Auditor's Report Financial Statements: Balance Sheets ........................................................ F2 Statements of Operations .............................................. F3 Statements of Changes in Stockholders' Deficit......................... F4 Statements of Cash Flows .............................................. F5 Notes to Consolidated Financial Statements ........................... F6-F10 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of LBO Capital Corp We have audited the accompanying balance sheet of LBO Capital Corp., as of December 31, 1999, and the related statements of operations, changes in stockholders' deficit, and cash flows for the year ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of LBO Capital Corp. as of December 31, 1998 and 1997 were audited by other auditors whose reports dated March 23, 1999 and March 24, 1998 expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LBO Capital Corp. as of December 31, 1999, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /S/ J L Stephan Co, PC - ----------------------- J L Stephan Co, PC Traverse City, Michigan March 30, 2000 F1
LBO CAPITAL CORP. BALANCE SHEETS As of December 31, 1999 and 1998 1999 1998 ---------------------------------------- ASSETS Current Assets: Cash and Equivalents $ 63 $ 73 Marketable Securities - Available for Sale 32,600 46,023 Interest Receivable 15,780 0 Notes Receivable 300,000 0 -------------- ------------ Total Current Assets 348,443 46,096 -------------- ------------ TOTAL ASSETS $ 348,443 $ 46,096 ============== ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Accounts Payable 3,250 3,763 Accounts Payable - Related Entities 300 210 Notes Payable - Other 823,201 514,901 Accrued Expenses and Taxes 194,021 126,319 -------------- ------------ Total Current Liabilities 1,020,773 645,193 Stockholders' Equity Common Stock, $.0001 par value; Authorized 100,000,000 Shares; Issued and Outstanding 12,100,000 shares 1,210 1,210 Additional Paid-In Capital 623,094 623,094 Unrealized Gain(Loss) on Available for Sale Securities (15,796) (2,373) Accumulated Deficit (1,280,836) (1,221,027) -------------- ------------ Total Stockholders' Deficit (672,330) (599,097) -------------- ------------ TOTAL LIABILITIES & STOCKHOLDERS' DEFICIT $ 348,443 $ 46,096 ============== ============ The accompanying notes are an integral part of of this financial statement. F2
LBO CAPITAL CORP. STATEMENTS OF OPERATIONS For the Years Ended December 31, 1999, 1998, and 1997 1999 1998 1997 -------------- ---------------------- -------------- REVENUES: $ 15,781 $ -0- $ -0- ------------ ------------- -------------- EXPENSES: Professional Services 4,243 3,659 3,820 Management Fees 3,300 2,790 2,900 Interest Expense 67,701 52,843 52,735 Other Expenses 346 162 (906) ------------ ------------- -------------- Total Expenses 75,590 59,454 58,549 ------------ ------------- -------------- Income (Loss) Before Income Taxes (59,809) (59,454) (58,549) Income Tax Expense (Benefit): Currently Payable -0- -0- -0- ------------ ------------- -------------- Net Income (Loss) $ (59,809) $ (59,454) $ (58,549) ============ ============= ============== Net Income (Loss) per Share $ (.00) $ (.00) $ (.00) ============ ============= ============== Weighted Average Number of Common Shares Outstanding 12,100,000 12,100,000 12,100,000 ============ ============= ============== The accompanying notes are an intergral part of this financial statement F3
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT For the Years Ended December 31, 1999, 1998, and 1997 Additional Total Common Stock Paid-In Accumulated Other Stockholders' ---------------------------- Comprehensive Shares Amount Capital Deficit Income Deficit --------- --------- ----------- ------------ ----------- ----------- Balances at December 31, 1996 12,100,000 $ 1,210 $ 623,094 $ (1,103,024) $(19,632) $ (498,352) Unrealized Gain (Loss) on Securities (3,835) Net Loss for the Year Ended December 31, 1997 -0- -0- -0- (58,549) (62,384) ----------- ---------- ----------- ----------- ----------- ------------ Balances at December 31, 1997 12,100,000 $ 1,210 $ 623,094 $ (1,161,573) $(23,467) $ (560,736) Unrealized Gain (Loss) on Securities 21,094 Net Loss for the Year Ended December 31, 1998 -0- -0- -0- (59,454) (38,361) ----------- ---------- ----------- ------------ ----------- ----------- Balances at December 31, 1998 12,100,000 $ 1,210 $ 623,094 $ (1,221,027) $(2,373) $ (599,097) Unrealized Gain (Loss) on Securities (13,423) Net Loss for the Year Ended December 31, 1999 -0- -0- -0- (59,809) (73,232) ----------- --------- ----------- ------------ ----------- ---------- Balances at December 31, 1999 12,100,000 $ 1,210 $ 623,094 $ (1,280,836) $(15,796) $ (672,330) =========== ========== =========== ============ ========== ========== The accompanying notes are an integral part of this financial statement F4
LBO CAPITAL CORP. STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 1998, and 1997 1999 1998 1997 ------------------------------------------------------------------------ Cash Flows for Operating Activities: Net Loss $ (59,809) $ (59,454) $ (58,549) -------------- ------------- ------------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Changes in Assets and Liabilities: (Increase) Decrease in: Prepaid Expenses and Deposits -0- -0- -0- (Decrease) Increase in: Accounts Payable (423) (440) 499 Accrued Expenses and Taxes 67,702 51,994 52,836 -------------- ------------- ------------- Total Adjustments 67,279 51,554 53,335 -------------- ------------- ------------- Net Cash (Used for) Operations 7,470 (7,900) (5,214) -------------- ------------- ------------- Cash (Used for) Investing Activities Investment (300,000) -0- -0- -------------- ------------- ------------- (300,000) 0 -0- Cash provided by (used for) Financing Activities: Proceeds from Notes - Other 308,300 7,930 5,180 Interest Income (15,781) -0- -0- -------------- ------------- ------------- Net Cash Provided by Financing Activities 292,519 7,930 5,180 -------------- ------------- ------------- Net Increase (Decrease) in Cash (11) 30 (35) Cash and Cash Equivalents: At Beginning of Period 73 43 78 -------------- ------------- ------------- At End of Period $ 63 $ 73 $ 43 ============== ============= ============= The accompanying notes are an integral part of this financial statement F5
LBO CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 Note 1. Summary of Significant Accounting Policies Organization and Business LBO Capital Corp. (the "Company") was incorporated on October 8, 1987 under the laws of the State of Colorado. The Company is engaged in evaluating and investing in other companies. The Company was considered to be in the development stage in 1987 and began operations on March 15, 1988. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less cash equivalents. Equipment and Depreciation Equipment was stated at cost. Depreciation was computed for financial reporting purposes on a straight-line basis over an estimated life of 5 years. Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was $0, $0 and $0 respectively. At December 31, 1995, the remaining computer equipment that was previously leased to an investee was determined to be obsolete and written off the books of the Company. Income Taxes At December 31, 1999, the Company has a net operating loss available for carryforward totaling approximately $1,023,141. The operating loss carryforward expires in various amounts by the year ended December 31, 2020. Net Loss Per Share Net loss per share is computed using weighted average shares outstanding without giving effect to the common stock warrants, as the effect would be antidilutive. Note 2. Marketable Securities The Company's marketable securities available for sale are recorded at fair market value. LBO CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 Market Value ---------------------------------------------------- Investment Per Share Aggregate 1999 ---- Enercorp, Inc. $48,397 $2.125 $32,600 1998 ---- Enercorp, Inc. $ 48,397 $3.000 $46,023 Note 3. Investments On April 3, 1989, the Company acquired an aggregate of 1,880,000 restricted common shares of Ajay Sports, Inc. ("Ajay") for a total purchase price of $182,000. As a result of recording the Company's equity in net losses of Ajay, the carrying value of this investment is zero at December 31, 1999 and 1998. The Company also obtained 200,000 stock warrants of Ajay at that time. In March 1991, the Company pledged 400,000 shares of its Ajay investment as security for bank loans to an acquisition candidate. On June 1 1991, the bank declared the loan in default and foreclosed on the shares. On August 13, 1998, Ajay announced that its board of directors had authorized the implementation of a 1-for-6 reverse split of the company's common stock, effective with the commencement of trading on August 14, 1998. The stockholders of Ajay at the company's annual meeting on May 29, 1998 approved the reverse split. Following the reverse split, holders of Ajay's common stock received one new share of $.01 par value common stock for every six shares of common stock currently held. Therefore, the number of Ajay shares held by the Company is 246,667. The reverse split also affected the number and exercise price of the Company's warrants, such that the Company now holds 33,333 warrants entitling it to purchase one share of Ajay's common stock at $1.08 per share. These warrants expire June 30, 2000. All of the Ajay shares are pledged as security for a note payable (see note 4). The stock of Ajay is traded over-the-counter and is reported by the National Quotation Service. The following table sets forth the range of high and low trade prices given quarterly by NASDAQ. LBO CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 HI LOW ---- ----- 1999 First Quarter $ 1.063 $ .688 Second Quarter $ 3.000 $ .688 Third Quarter $ 2.063 $ .813 Fourth Quarter $ .938 $ .500 Note 4. Note Receivable On June 22, 1999, the Company loaned $300,000 to Pro Golf International, Inc. ("PGI"), a subsidiary of Ajay Sports, Inc. The Company received two promissory notes that is subordinated to PGI's primary lender. The unpaid principal balance will bear an interest rate of 10% and will be due and payable in full on July 22, 2000. The balance ,including interest, at December 31, 1999 was $315,781. The proceeds were used to purchase all the outstanding capital stock of Pro Golf of America, Inc., franchiser of Pro Golf Discount retail golf stores. Ajay owns over 80% of the stock of Pro Golf International, with the remaining shares held by a group of investors. Note 5. Notes Payable During 1998, the Company borrowed $308,300 from Dearborn Wheels, Inc. The proceeds were used to meet current operating needs and the investment in Pro Golf International. On December 2, 1996, the Registrant had a change in its borrowing arrangements. The Registrant borrowed $325,790 from Dearborn Wheels, Inc. to repay a note payable to Michigan National Bank. The principal balance as of December 31, 1998, was $514,901. The loan is at prime plus 2% interest and is secured by all the intangible assets of the Registrant. Dearborn Wheels, Inc. is held in majority by the Registrant's President's spouse. This note bears interest of prime plus 2%, matures on September 27, 2000 and is secured by all the assets of the Company. Note 6. Capital Stock The Company completed a public offering on March 15, 1988 consisting of 3,000,000 units at $.20 each. Each unit consisted of one common share, one callable class A common stock purchase warrant, one callable Class B common stock purchase warrant and one callable Class C common stock purchase warrant. Each Class A warrant entitles the warrant holder to purchase one share of common stock for $.50, each Class B warrant entitles the warrant holder to purchase one share of common stock for $.75, and each Class C common stock purchase warrant entitles the warrant holder to purchase one share of common for $1.00. The Class A, B and C warrants were originally exercisable within twelve, eighteen and twenty-four months respectively, from February 26, 1988. All warrants have been extended until July 25, 2000. As of December 31, 1999, no warrants had been exercised. The Company has the right to call any or all warrants at a redemption price of $.0001 per warrant. On June 3, 1992 the Company issued 3,000,000 shares of its common stock, valued at $.04 per share (fair market value on that date, per the National Quotation Bureau, Inc.), to an officer and director in exchange for a reduction of $120,000 in a note to a related company. The Company granted to its directors a total of 1,300,000 warrants, expiring December 4, 2000. Each warrant enables the owner to purchase one share of common stock for $.04 per share. Note 7. Management Fees The Company does not employ any personnel. Per a management fee agreement with Acrodyne Corporation, a related entity, the Company pays direct labor costs plus overhead for management services rendered. Note 8. Cash Flows Disclosure Interest and income taxes paid for the years ended December 31, 1999, 1998 and 1997 were as follows: 1999 1998 1997 -------- ---------- ----------- Interest $ -0- $ -0- $ -0- ========== ========== =========== Income Taxes $ -0- $ -0- $ -0- ========== ========== =========== LBO CAPITAL CORP. NOTES TO FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 Note 9. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. EX-27 2 FDS --
5 (Replace this text with the legend) 0000753557 LBO Capital Corp. 1 US Dollar 12-MOS Dec-31-1999 Jan-01-2000 Dec-31-1999 1 63 32,600 315,780 0 0 348,443 0 0 348,443 1,020,773 0 0 0 1,210 (673,540) 348,443 0 15,781 0 7,889 0 0 67,701 (59,809) 0 0 0 0 0 (59,809) (0.00) (0.00)
EX-99 3 AJS FINANCIAL STATEMENTS FOR Y/E 12/31/99
AJAY SPORTS, INC. AND SUBSIDIARIES Consolidated Balance Sheets as of December 31, 1999 and 1998 (in thousands, except share amounts) December 31, December 31, ASSETS 1999 1998 ----------- ----------- Current assets: Cash $ 101 $ 6 Marketable securities - available for sale 348 396 Accounts receivable, net of allowance of $558 and $95, respectively 3,247 1,889 Inventories 3,969 5,680 Prepaid expenses and other 1,179 485 ----------- ----------- Total current assets 8,844 8,456 Fixed assets, net 1,693 1,708 Other assets 7,037 179 Deferred tax benefit 6,582 1,119 Goodwill 1,577 1,621 ----------- ----------- Total assets $ 25,733 $ 13,083 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long term debt $ 995 $ 199 Accounts payable 5,043 2,225 Accrued expenses 1,099 380 ----------- ----------- Total current liabilities 7,137 2,804 Notes payable to affiliates - long term 2,087 1,587 Notes payable to banks - long term 13,886 5,951 Notes payable - long term 2,070 - Commitments and contingencies - - ----------- ----------- 25,180 10,342 ----------- ----------- Minority interest in subsidiary 24 - ----------- ----------- Stockholders' equity: Preferred stock - 10,000,000 shares authorized Series B, $0.01 par value, 12,500 shares outstanding at liquidation value 1,250 1,250 Series C, $0.01 par value, 217,939 and 264,177 shares outstanding, respectively, at stated value 2,179 2,642 Series D, $0.01 par value, 6,000,000 shares 60 60 Common stock, $0.01 par value, 100,000,000 shares authorized, 4,091,091 and 3,956,815 shares outstanding, respectively 41 40 Additional paid-in capital 15,500 14,762 Accumulated deficit (18,470) (16,006) Accumulated other comprehensive income (31) (7) ----------- ----------- Total stockholders' equity 529 2,741 ----------- ----------- Total liabilities and stockholders' equity $ 25,733 $ 13,083 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. F-2
AJAY SPORTS, INC. AND SUBSIDIARIES Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 (in thousands, except per share amounts) Year Ended -------------------------------------------- December 31, December 31, December 31, 1999 1998 1997 ---------- ---------- ---------- Operating data: Net sales $ 14,340 $ 22,925 $ 30,330 Cost of sales 12,790 19,477 26,585 ---------- ---------- ---------- Gross profit 1,550 3,448 3,745 Selling, general and administrative expenses 4,866 3,868 5,837 ---------- ---------- ---------- Operating (loss) (3,316) (420) (2,092) ---------- ---------- ---------- Nonoperating income (expense): Interest expense (1,625) (1,139) (1,280) Other, net 638 84 (144) ---------- ---------- ---------- Total non operating expense (987) (1,055) (1,424) ---------- ---------- ---------- (Loss) before minority interest and income taxes (4,303) (1,475) (3,516) Minority interest in (loss) of subsidiary 6 - - ---------- ---------- ---------- (Loss) before income taxes (4,297) (1,475) (3,516) Income tax (benefit) (1,833) - - ---------- ---------- ---------- Net (loss) $ (2,464) $ (1,475) $ (3,516) ========== ========== ========== Basic and diluted earnings per share (a) $ (0.70) $ (0.47) $ (1.01) ========== ========== ========== Weighted average common shares outstanding (b) 4,013 3,909 3,879 ========== ========== ========== Net loss as reported above (2,464) (1,475) (3,516) Undeclared cumulative preferred dividends (341) (380) (396) ---------- ---------- ---------- Loss applicable to common stock $ (2,805) $ (1,855) $ (3,912) ========== ========== ========== (a) Computed by dividing net loss after deducting undeclared, cumulative preferred stock dividends, by the weighted average number of common shares outstanding. (b) Current and prior years restated to reflect result of reverse 1:6 common stock split effective August 14, 1998. The accompanying notes are an integral part of the consolidated financial statements. F-3
AJAY SPORTS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 (in thousands, except shares) Preferred Stock Common Stock Add'l Accum Total --------------- ------------ Paid-in Accum Comprehensive Stockholders' Shares Amount Shares Amount Capital (Deficit) Income (Loss) Equity -------- ------ -------- ------- -------- ---------- ------------ ----------- Balances at December 31,1996 3,086,706 $4,212 3,879,007 $ 233 $9,313 $ (11,015) $ - $ 2,743 Net loss - - - - - (3,516) - (3,516) -------- ------ --------- ------- -------- ---------- ------------ ------------ Balances at December 31, 1997 3,086,707 4,212 3,879,007 233 9,313 (14,531) - (773) Common stock reverse 1:6 split - - 250 (194) 194 - - - Other adjustments - - - (4) - - - (4) Preferred stock converted into common stock (31,993) (320) 77,558 1 319 - - - Debt converted into preferred stock 6,000,000 60 - - 4,940 - - 5,000 COMPREHENSIVE INCOME Net loss - - - - - (1,475) - (1,475) Other Comprehesive Income (Loss) - - - - - - (7) (7) --------- ------ -------- ------- -------- --------- ------------ ------------ Balances at December 31, 1998 6,276,677 3,952 3,956,815 40 14,762 (16,006) (7) 2,741 Preferred stock converted into common stock (46,238) (463) 134,276 1 738 - - 276 COMPREHENSIVE INCOME Net Loss (2,464) (2,464) Other Comprehesive Income (Loss) (24) (24) -------- ------ -------- ------- --------- --------- ----------- ------------- Balances at December 31, 1999 6,230,439 $3,489 4,091,09 $ 41 $15,500 $ (18,470) (31) $ 529 ======== ======== ======== ======= ========= ========== =========== ============= The accompanying notes are an integral part of the consolidated financial statements. F-4
AJAY SPORTS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 (in thousands) December 31, ------------------------------ 1999 1998 1997 -------- --------- -------- Cash flows from operating activities: Net (loss) $ (2,464) $ (1,475) $ (3,516) Adjustments to reconcile to net cash flows from operating activities: (Gain) loss on sale of assets (7) - 42 Depreciation and amortization 335 381 358 Income tax provision (1,833) - - (Increase) decrease in marketable securities 48 (396) - (Increase) decrease in accounts receivable, net (1,358) 3,171 214 Decrease in inventories 1,711 718 1,559 (Increase) decrease in prepaid expenses (694) (181) 58 (Increase) decrease in other assets - (75) 202 Increase(decrease) in accounts payable 2,818 (979) 97 Increase (decrease) in accrued expenses 719 (303) 186 -------- --------- -------- Net cash provided by (used in) operating activities (725) 861 (800) -------- --------- -------- Cash flows from investing activities: Acquisitions of property plant and equipment (281) (319) (250) Disposal of equipment 19 - - -------- --------- -------- Net cash (used in) investing activities (262) (319) (250) -------- --------- -------- Cash flows from financing activities: Net increase in advances from affiliates 500 2,215 3,487 Net increase (decrease) in bank notes payable 306 (2,978) (2,193) Dividends paid - - (74) Minority interest in subsidiary 300 Unrealized losses from securities (24) (7) - -------- --------- -------- Net cash provided by (used in) financing activities 1,082 (770) 1,220 -------- --------- -------- Net increase (decrease) in cash 95 (228) 170 Cash at beginning of period 6 234 64 -------- --------- -------- Cash at end of period $ 101 $ 6 $ 234 ======== ========= ======== The accompanying notes are an integral part of the consolidated financial statements. F-5
AJAY SPORTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The consolidated financial statements include the accounts of Ajay Sports, Inc. ("Sports") and its wholly-owned operating company subsidiaries, Ajay Leisure Products, Inc. ("Ajay"), Leisure Life, Inc. ("Leisure"), Palm Springs Golf, Inc. ("Palm Springs"), Prestige Golf Corp. ("Prestige"), and majority-owned subsidiaries, Pro Golf International, Inc. ("PGI"), Pro Golf of America, Inc. ("PGOA"), and ProGolf.com, Inc. ("PG.com") collectively referred to herein as the "Company". All significant intercompany balances and transactions have been eliminated. INVENTORIES - Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. FIXED ASSETS - Fixed assets are stated at cost, less accumulated depreciation of $1,834,000 and $1,329,000 as of December 31, 1999 and 1998 respectively. Fixed assets of the Company consist primarily of machinery and equipment, office equipment, and a building. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to thirty-nine years. GOODWILL - The Company has recorded goodwill as a result of the 1995 acquisitions of Palm Springs and Korex. The goodwill is being amortized over forty years. Amortization expense related to the goodwill was $43,900 for the year ended December 31, 1999. As of each annual year-end date, management assesses whether there has been an impairment in the carrying value of goodwill. This assessment involves comparing the unamortized goodwill carrying value with undiscounted cumulative estimated future cash flows expected to be derived from utilization of the intangibles underlying the related goodwill. To the extent that undiscounted cumulative cash flow is expected to exceed the carrying value of goodwill, the asset is considered to be unimpaired. OTHER ASSETS - Other assets at December 31, 1999 and 1998 consist of trademarks and brand names held by PGI (1999 only) and patents and trademarks held and applied for by Leisure, and additionally, at December 31, 1998 a lawsuit judgment. Amortization expense related to trademarks and patents is being deducted straight-line over the estimated useful lives of these assets. Amortization expense related to the other assets was $193,000 for the year ended December 31, 1999. PRODUCT LIABILITY AND WARRANTY COSTS - Product liability exposure is insured with insurance premiums provided during the year. Product warranty costs are based on experience and attempt to match such costs with the related product sales. REVENUE RECOGNITION -The Company recognizes revenue from sales of product when title to the product has passed, which is generally the date the product is shipped. PGOA recognizes Initial Franchise Fee revenue when all material services or conditions relating to the sale have been substantially performed or satisfied by the franchiser. INCOME TAXES - Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, using enacted statutory rates applicable to future years. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. COMMON STOCK - The Company reverse split its common stock in a 1-for-6 ratio effective with commencement of trading on August 14, 1998. As a result of this transaction, all historic data in the financial statements that reference common shares, options, earnings per share or preferred conversion ratios have been restated to reflect this split as if it preceded all prior reporting. Historic actual common shares outstanding at December 31, 1997 were 23,274,039 and were restated to 3,879,007 in this report. 2. RELATED PARTY TRANSACTIONS -------------------------- The Company's related parties include the following: First Equity Corporation ("First Equity") - First Equity is owned by a family member of the president, chief executive officer, and chairman of the Company. First Equity held, at December 31, 1997, demand notes in the amount of $748,000 as a result of loans made to the company in 1996 and 1997. Williams assumed these notes in the financial restructuring in 1998. First Equity made short-term working capital loans to Ajay during 1999, with interest at various market rates. The balance due on these loans at December 31, 1999 was $445,647, including accrued interest of $5,647. Enercorp, Inc. ("Enercorp") - is a business development company engaged in the business of investing in and providing managerial assistance to developing companies. The Company's president, chief executive officer, chairman and principal shareholder is a significant shareholder in Enercorp. Enercorp holds 310,787 common shares acquired in 1994 and 1995 and 2,000 shares of series C preferred stock. Enercorp held at December 31, 1997, demand notes in the amount of $200,000 as a result of loans made to the Company. Williams assumed these notes in the financial restructuring in 1998. During 1999, Enercorp loaned PGI $420,000 under a 13 month, 10% subordinated note. In February, 2000 Enercorp converted the note and accrued interest of $27,000 into 7,450 shares of PGI at $60 each. Williams Controls, Inc. ("Williams") - Williams has the same chairman as the Company, which individual is a major shareholder of each company. Williams owns 686,274 shares of the Company's common stock, 1,851,813 common stock options and 6,000,000 shares of Series D cumulative convertible preferred stock as of December 31, 1999, convertible into 3,333,333 shares of the Company's common stock. During 1996 and 1997 the Company paid Williams 0.50% per annum of the outstanding revolving loan balances in consideration for providing its guarantee of a revolving loan from U. S. Bank. Fees totaled $39,750 and $60,411 for the years ended December 31, 1997 and 1996 respectively. From July 11, 1997 through June 30, 1998 the Company and Williams shared a joint and several loan obligation. On June 30, 1998, the Company restructured its credit facility with Wells Fargo Bank, N.A. ("Wells") to separate its credit facility from that of Williams. As a result of this transaction, the Company will no longer have joint and several liability, cross collateral agreements or guarantees with Williams. In connection with the restructuring of the Wells credit facility, the Company was advanced $2,000,000 additional funds by Williams in the form of a long term note and marketable securities and Williams converted $5,000,000 of Company debt into a newly created series D cumulative convertible preferred stock. The Company's interest expense paid to Williams was $62,900 and $346,000 for the years ended December 31, 1999 and 1998 respectively. (See Note 4). The Company received 166,719 shares of Williams as part of the restructuring agreement with Williams dated June 30, 1998. These shares have been pledged to Wells Fargo as collateral for the Company's loans. The common stock is classified as marketable securities available for sale and are valued at $2.08 per share, which is the last trade for 1999. During 1999, the Company had borrowings from affiliated parties, in addition to those mentioned above, to finance its acquisition of PGOA and PG.com. These borrowings totalled $450,000, with interest at an annual rate of 10%. In February, 2000, these borrowings (and accrued interest totalling $30,000) were converted into 8,000 shares of PGI common stock at $60 per share. During 1997 and 1996 the Company borrowed from related and affiliated parties until it obtained bank financing in mid 1997. As of December 31, 1997, the Company owed $4,372,000 to related and affiliated parties at interest rates ranging from 9.0% to 9.5%. These notes were converted to preferred stock in 1998. (See Note 4). 3. INVENTORIES ----------- Inventories consist of the following (in thousands): December 31 1999 1998 -------- -------- Raw materials $ 827 $ 1,493 Work-in-progress 903 1,052 Finished goods 2,239 3,135 -------- -------- Total $ 3,969 $ 5,680 ======== ======== 4. DEBT ---- On December 31, 1999 the Company's total debt was $19,038,000 owed to banks, Williams, and other affiliates. This compares to $7,724,000 for December 31, 1998. The increase from 1998 is principally due to debt incurred to purchase the Pro Golf companies. From July 11, 1997 until June 30, 1998 the Company shared in a combined credit agreement with Williams (the "Joint Loan"). As of June 30, 1998 the Company restructured its credit facility with Wells to separate from the joint and several credit facility with Williams. This new credit facility eliminates cross collateral and guarantee agreements involving the Company and Williams. The revolving loan facility allows the Company to borrow up to the lesser of $9,500,000 or the Borrowing Base. The Borrowing Base consists of a formula including certain eligible receivables, inventories and letters of credit at rates established by Wells. The present credit agreement matures June 30, 2001. The proceeds from the Joint Loan were used to repay the Company's and Williams then outstanding loans from the previous lender, U. S. Bank, except for a bridge loan in the total amount of $2,140,000 to the Company by U. S. Bank. This bridge loan is to be repaid from the sale of assets and/or excess cash flows of Williams and/or the Company, and is guaranteed up to $1,000,000 by the Company's president. The balance owed on this bridge loan at December 31, 1999 is $1,365,000. In connection with the 1998 credit facility restructuring, the Company was advanced $2,000,000 of additional funds by Williams and Williams converted $5,000,000 of company debt into preferred stock. The Company's Bank borrowings consisted of the following (dollars in thousands): December 31, Revolving credit facility: 1999 1998 -------- -------- Balance $ 3,862 $ 3,467 Interest rate 8.5% 8.75% Unused amount of facility $ -0- $ 350 Average amount outstanding during the period $ 4,258 $ 4,997 Weighted average interest rate 8.2% 9.1% Maximum amount outstanding during the period $ 5,295 $ 6,771 Master revolving note: Balance $ 8,425 $ - Weighted average interest rate 9.0% - Average amount outstanding during the period $ 8,479 $ - Outstanding commercial letters of credit totaled approximately $309,000 and $60,000 at December 31, 1999 and 1998 respectively. Other December 31, 1999 debt consisted of $2,087,900 from related and affiliated parties, a $412,500 machinery and equipment term loan with Wells Fargo, the $1,364,538 (bridge) term loan with U. S. Bank, a $173,000 real estate loan, a $8,425,000 bridge loan with Comerica Bank, and $1,200,000 with private individuals. At December 31, 1999 the Company was liable to Comerica Bank in the amount of $8,425,000 on a master revolving note entered into to effect the acquisition of Pro Golf of America, Inc. and ProGolf.com, Inc. The note has been extended through April 30, 2000. The Company anticipates refinancing this loan into an amortizing long-term loan during the second quarter 2000. (See Note 16). Debt payments are as scheduled (dollars in thousands): 2000 995 2001 6,354 2002 1,000 2003 10,689 2004 and thereafter -0- The seasonal nature of the Company's sales creates fluctuating demands on its cash flow, due to the temporary build-up of inventories in anticipation of, and receivables subsequent to, the peak seasonal period which historically has been from February through May of each year. The Company has relied and continues to rely heavily on its revolving credit facility and loans from related parties and affiliated companies for its working capital requirements. (See Note 16). 5. INCOME TAXES ------------ As discussed in Note 2, the Company adopted SFAS No. 109 at the beginning of 1992. There was no cumulative effect of this accounting change and its adoption had no impact on 1992 net income. The actual income tax expense (benefit) differs from the statutory income tax expense (benefit) as follows (in thousands): Year Ended December 31, ----------------------- 1999 1998 1997 ------ ------ ----- Statutory tax expense (benefit) $(1,833) $( 502) $(1,195) Utilization of net operating loss carry forward - - - Loss producing no current tax benefit - 502 1,195 -------- ------- --------- $(1,833) $ - $ - ======== ======= ========= The components of the net deferred tax asset/liability were as follows (in thousands): December 31, ------------ 1999 1998 ---- ---- Deferred tax assets: Accrued expenses $ 45 $ 45 Reserves 78 151 NOL carry forwards 6,473 4,766 ------ ------ Sub total $ 6,596 $ 4,962 Deferred tax liability, principally depreciation and amortization (13) (99) Valuation allowance - (3,744) Net $ 6,583 $ 1,119 ======= ======= At December 31, 1999, the Company assessed its past earnings history and trends, sales backlog, budgeted sales, and expiration dates of carry forwards and has determined that it is more likely than not that 100% of deferred tax assets will be realized. This change versus 1998 is principally due to the profits to be realized from operations of PGOA and PG.com. The valuation allowance of $3,744,000 at December 31, 1998 was maintained on deferred tax assets which the Company had determined to be more likely than not unrealizable at that time. The Company had net operating loss carry forwards for Federal tax purposes of approximately $18,567,000 at December 31, 1999, which expire in varying amounts in the years 2006 through 2019. Substantial operating loss carry forwards are available to offset future state taxable income of the Company, which expire in varying amounts in the years 2006 through 2019. Future changes in ownership, as defined by section 382 of the Internal Revenue Code, could limit the amount of net operating loss carry forwards used in any one year. 6. STOCKHOLDERS' EQUITY -------------------- (a) Preferred Stock In October 1994 the Company created its Series B 8% cumulative convertible preferred stock and allowed for its exchange, on a share-for-share basis, with the Company's Series A preferred stock. The holder exchanged 29,500 shares of Series A preferred stock for 29,500 shares of the newly issued Series B preferred stock and immediately converted 17,000 shares of its Series B preferred stock for 5,040,000 (840,000 post split) shares of the common stock of the Company, as the Series B preferred stock allowed for a conversion rate of 1 share of Series B preferred stock for 294.12 shares of the Company's common stock. In November 1997, the conversion rate on the remaining 12,500 Series B shares was revised to 555.56 and after the 1:6 reverse common stock split of August 14, 1998 the conversion rate as of December 31, 1998 is 92.5926. In July 1995 the Company sold 325,000 shares of Series C 10% cumulative convertible preferred stock and 325,000 warrants in a registered public offering. The Series C preferred stock is convertible into shares of the Company's common stock at a conversion rate of 2.42424 common shares for each share of preferred stock. Cumulative dividends are payable on the Series C preferred stock at an annual rate of $1.00 per share. The warrants are redeemable by the Company at $0.05 per warrant under certain conditions. The terms of these warrants are identical to the Company's publicly held warrants to purchase common stock. In 1995 the Company used the $2.8 million of net proceeds for inventory and accounts receivable financing and to acquire certain assets of Korex and Palm Springs. At December 31, 1999, 1998 and 1997, dividends in arrears on the 8% cumulative convertible preferred Series B stock were $1,106,575, $1,006,575 and $906,575 respectively. Dividends on the Series C cumulative convertible preferred stock were declared and paid through December 31, 1996. No dividends were declared or paid for 1999, 1998 or 1997. At December 31, 1999, 1998 and 1997, dividends in arrears on the 10% cumulative convertible preferred Series C stock were $817,232, $576,174 and $296,000. The Company has dedicated all available funds to support continuing operations of the Company until sufficient cash availability allows declaration and payment of dividends. (b) Stock issued to officers The Company has a stock incentive plan for officers of the Company, under which up to 150,000 shares of the Company's stock may be granted annually. No stock was issued to officers under this plan in 1999, 1998 or 1997. (c) Stock Issued for Acquisitions In 1994 the Company acquired the outstanding common stock of Leisure Life, Inc. for 1,500,000 (post split 250,000) shares of its common stock to the owner of Leisure Life. During the periods 1995, 1996 and 1997 one half of the originally issued shares were returned to the Company due to unmet performance requirements. (d) Warrants and Options A summary of activity related to warrants and options to purchase Company common stock is as follows: Warrants and Price Options (i) Per Share(i) ------- ------------ ------------- Balance, December 31, 1996 2,767,935 $ 2.04 - 6.00 Issued to Employees 8,334 2.40 (ii) Expired (27,500) 2.40 - 3.75 Repriced options (2,151,313) 2.04 - 3.00 (iii) Repriced options 2,151,313 1.08 (iii) --------- Balance, December 31, 1997 2,748,769 $ 1.08 - 6.00 Expired (122,287) 2.40 - 4.125 Issued to Directors 1,668 1.50 (iv) ------------ Balance, December 31, 1998 2,628,150 $ 1.08 - 6.00 Issued to Employees 50,000 1.00 Expired 83,334 2.40 - 4.125 ------ Balance, December 31, 1999 2,594,816 $ 1.00 - 6.00 (i) All options were adjusted for the effect of a 1:6 reverse common stock split effective August 14, 1998. (ii) Employee stock options of which none were vested. (iii) All non-public, non-employee, non-board member options were repriced to $.18 market in November 1997. (iv) Director options - 67% vested. 7. MAJOR CUSTOMERS --------------- The Company operates in three lines of business, the manufacture and distribution of sports equipment, outdoor leisure furniture, and franchising. The Company's customers are principally in the retail sales market. The Company performs ongoing credit evaluations of its customers' financial conditions and does not generally require collateral. Sales to customers which represent over 10% of the Company's net sales are as follows: Year ended December 31, -------------------------- Customer 1999 1998 1997 A 25% 28% 30% B * 26% 15% C * * 11% * Amounts are less than 10% of net sales. 8. BUSINESS SEGMENT REPORTING -------------------------- The relative contributions to net sales, operating profit and identifiable assets of the Company's two industry segments for the years ended December 31, 1999 and 1998 are as follows (in thousands):
GOLF ------------------------------------------- Mass Specialty 1999 Furniture Merchant Golf Stores Franchise Corporate Consolidated -------------- --------- --------- ----------- --------- --------- ------------ Sales $ 4,766 $ 6,751 $ 1,080 $ 1,743 $ - $ 14,340 Oper profit/(loss) (398) (2,370) (191) 469 (704) (3,194) Assets 2,487 2,345 6,338 14,563 - 25,733 Depn/Amort 151 223 51 318 - 425 Capital Exp. - 57 - 224 - 281 GOLF ------------------------------------------- Mass Specialty 1998 Furniture Merchant Golf Stores Franchise Corporate Consolidated -------------- --------- --------- ----------- --------- --------- ------------- Sales $ 3,785 $ 17,916 $ 1,224 - $ - $ 22,925 Operating profit/(loss) (241) 863 (494) - (548) (420) Assets 2,673 8,564 1,846 - - 13,083 Depreciation/Amortization 92 229 60 - - 381 Capital Expenditures 175 144 - - - 319
9 . GARY PLAYER AND SPALDING LICENSE AGREEMENTS ------------------------------------------- On March 8, 1999 the Company entered into a new license agreement with Gary Player Group, Inc. The Company will work toward developing the Gary Player brand for marketing its products. The Gary Player agreement has a 5-year term and covers golf bags, gloves, carts and certain other golf accessories sold into the U. S. market. This agreement requires an annual $25,000 rights fee and a minimum annual royalty of $5,000 for the sixteen months commencing on March 8, 1999 through June 30, 2000 and increases annually by $5,000 for each of the remaining 4 years of the contract. Ajay had operated since 1983 under a license from Spalding Sports Worldwide to utilize the Spalding trademark in conjunction with the sale and distribution of golf bags, golf gloves, hand pulled golf carts and certain other golf accessories in the United States. On March 8, 1999, the Company announced a limited extension of its existing agreement to provide a phaseout period of up to 18 months for its Spalding labeled products. The Company agreed to pay Spalding $240,000 during the phase out period. The prior agreement contained a minimum annual royalty of $550,000 plus 2% advertising of which 1% was paid direct. Earned royalty expense due Spalding was $160,000, $448,000 and $553,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 10. LEASES ------ Future aggregate minimum lease payments under noncancelable operating leases with initial or remaining terms in excess of one year are as follows (dollars in thousands): 2000 719 2001 507 2002 213 2003 175 2004 and thereafter 149 ------- $1,763 ======= Total rental expense ($000) under operating leases was $652, $605 and $701 for the years ended December 31, 1999, 1999 and 1997, respectively. 11. NET (LOSS) PER COMMON SHARE ---------------------------- Earnings or loss per share has been computed by dividing net income or loss, after reduction for preferred stock dividends in 1999 ($341,000), 1998 ($380,000), and 1997 ($396,000) by the weighted average number of common shares outstanding. No exercise of outstanding warrants was assumed in 1999, 1998 or 1997, since any exercise of warrants would be antidilutive. SFAS No. 128, "Earnings Per Share", became effective for fiscal years ending after December 15, 1997. This statement replaces the presentation of primary earnings per share ("EPS") with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires reconciliation of the numerator and denominator of the basic EPS computations to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared the earnings of the entity. 12. SUPPLEMENTAL CASH FLOW INFORMATION ---------------------------------- Cash paid for interest was $1,124,526, $1,209,693 and $776,077 for the years ended December 31, 1999, 1998 and 1997, respectively. Non cash financing and investing transactions were as follows: In exchange for acquiring in 1994 all of the common stock of Leisure Life, Inc. the Company issued 1,500,000 (post split 250,000) shares of its common stock to the owner of Leisure Life. During the periods 1995, 1996 and 1997 one half of the originally issued shares were returned to the Company due to unmet performance requirements. In 1997 there were no stock transactions. During 1998 preferred stock in the quantity of 31,993 shares were converted into 77,558 shares of common stock. During 1998 long-term debt of $5,000,000 was converted into 6,000,000 shares of Series D preferred stock. The Company added new leases during 1998 and 1997 that represent asset values respectively, if purchased, of approximately $103,000 and $57,000 and result in annual lease payments of $27,000 and $18,732 with terms expiring up to the year 2003. During 1999 Series C preferred stock in the quantity of 46,238 shares were converted into 112,085 shares of common stock. The Company borrowed $10,750,000 from a bank and others to acquire PGOA and acquired PGD Online, LLC during 1999. 13. COMMITMENTS AND CONTINGENCIES ----------------------------- The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, the Company has net losses before taxes of $4,297,000, $1,475,000 and $3,516,000 for the years ended December 31, 1999, 1998 and 1997. A bank loan to one of the Companies subsidiaries has been extended to April 30, 2000. The Company has is seeking a long-term extension of this loan, and to raise equity capital. The Company's ability to continue as a going concern is partially dependent on ability of management to successfully implement these plans. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company is subject to certain claims in the normal course of business which management intends to vigorously contest. The outcomes of these claims are not expected to have a material adverse affect on the Company's consolidated financial position or results of operations. (See Notes 4 and 9). 14. ACQUISITIONS ------------ In June 1999, Ajay, through a newly formed majority owned subsidiary (PGI) acquired 100% of the outstanding ownership interests of PGOA and PG.com. This acquisition was accounted for using the purchase method of accounting. The results of operations of the acquired companies have been included in Ajay's consolidated financial statements from the date of acquisition. Intercompany accounts and transactions between the acquired companies and Ajay, as applicable, have been eliminated. The acquisition price of $10,500,000 was paid in cash and financed through borrowings with a bank ($8,500,000) affiliated companies ($870,000) and private individuals ($1,200,000). The portion of the purchase price in excess of net book value was allocated to "Trademarks" and, net of the related income tax benefit and related trademark amortization, is shown in the consolidated balance sheet with "Other assets". 15. NEW ACCOUNTING PRONOUNCEMENTS ----------------------------- In March 1998, the Accounting Standards Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance for an enterprise on accounting for the costs of computer software developed or obtained for internal use. The Company adopted this statement during the year ended December 31, 1999 and has capitalized software costs according to the provisions of the standard. These costs are amortized on a straight-line basis over the useful life of the software once it is placed into service. In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement was amended by SFAS No. 137 and will be effective for financial statements for fiscal years beginning after June 15, 2000. The Company believes SFAS No. 133 will not have a material impact on its financial statements or accounting policies. The Company will adopt the provisions of SFAS No. 133 in the first quarter of 2001. 16. SUBSEQUENT EVENTS ----------------- During late 1999 and into 2000, the Company began selling equity in PGI in a private placement offering and entered into an agreement to acquire developed and undeveloped real estate for existing and planned golf-related activities, including golf domes with retail stores inside. As of April 14, 2000, the Company had committed to issue 138,750 shares of PGI stock at $60 per share, which represents 12.18% of the total shares of PGI stock outstanding at that date. Of the new shares committed to, $375,000 cash had been received with signed subscription documents, $870,000 was a conversion of subordinated debt into common stock, and the remaining $7,080,000 a combination of equity securities and golf-related real property. The Company anticipates substantial additional cash flows resulting from the debt conversions and the rents and fees to be received from the golf properties during the initial twelve-month period beginning July 1, 2000. These revenues are expected to increase in the future after the start-up period is over. Additionally, the dome and retail store combination is planned as the new PGOA franchise of the future and could substantially increase revenues and cash flow of the Company's PGOA operations. The Company began an offering of PG.com common stock in late April 2000 to raise up to $12,500,000 in gross offering proceeds. If the maximum offering is sold, the shares sold in this offering will represent approximately 33% of the total PG.com common shares outstanding after the offering. Proceeds from these private placements will be used for working capital, acquisitions, and growth. Effective March 15, 2000 PGI obtained an extension through April 30, 2000 on its master revolving note with Comerica Bank. PGI anticipates refinancing this loan into a long-term amortizing loan during the second quarter of 200. Schedule II
AJAY SPORTS, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended December 31, 1999, 1998, and 1997 (Amounts in Thousands) Balance Beginning Charged to Deducted from at end Balance expense Reserve of period --------- ---------- ------------- ---------- Reserve for Product Warranty: Year ended: December 31, 1999 $103 $271 $295 (1) $ 79 December 31, 1998 152 70 119 103 December 31, 1997 85 309 242 152 Reserve for Doubtful Receivables: Year ended: December 31, 1999 $318 (3) $263 $23 (2) $558 December 31, 1998 243 50 198 95 December 31, 1997 140 355 252 243 Reserve for Inventory Obsolescence: Year ended: December 31, 1999 $300 $350 $257 $393 December 31, 1998 425 292 417 300 December 31, 1997 491 398 464 425 Notes: (1) Represents amounts paid for product warranty claims. (2) Represents amounts charged off as uncollectible. (3) Includes $223 balance on books of company which was acquired in June, 1999
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